“In our view, the production outlook has materially weakened. And as data become available over coming months to confirm this, prices will lift further.

“Looking at New Zealand dairy supply, we expect a 5% production fall this season compared to last,” he said.

According to Penny the supply picture has weakened rapidly over recent weeks. Moreover, he said that its current forecast is significant dip compared to ASB’s previous forecast for 1% fall.

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“The chief reason for weaker production is the aggressive and ongoing dairy herd cull in response to very tight farm cashflows,” according to Penny.

NZ dairy herd size falling

The size of the New Zealand dairy herd is falling, according to Penny.

He said this fall is evidenced by NZ beef exports to the US racing ahead of last year’s level, to a point where NZ is going to breach its US quota for the first time since 2004.

In addition, he said cold and wet weather has stunted grass growth this spring.

“These weak conditions compare with very strong conditions last season, and the comparison with last season will become starker over coming months.

“In this light, the reductions to Fonterra’s auction volumes are to a degree a distracting from this message i.e. production is shaping up to be very weak this season (a 5% fall would be the largest since 1999),” Penny said.